CameralAccounting as an Alternative to Accrual Accounting

Professor, Dr. oecon, Norvald MonsenNorwegian School of Economics and Business Administration (NHH)Norvald.Monsen@NHH.NO

It appears that authorities often are changing over from the cameralist bookkeeping method to thecommercial method for reasons of prestige rather than from any efficiency comparisons of both methods.

(Oettle, 1990, p. 349)

Introduction

In recent years, we have witnessed an increasing interest in government accounting. For example, in

Public Fund Digest

(Vol. VI, No. 1, 2007), three interesting articles discussed the introduction of accrual accountingin government organizations. While Hughes (2007) and (2007) are positive about this development, Wynne(2007) is more sceptical. At the outset he states:

“Over the last 20 years, there have been sustained calls for governments to move towards accrual based accounting and to adopt private-sector-style financial statements. Indeed, this move has become some what of a trend or fashion and accrual accountingwas described recently as the hero of the day at an academic conference on public sector financial reporting.” (Wynne, 2007, p.25)

Wynne (2007, p. 26) underlines that government financial accounting has traditionally consisted of providingan out-turn report comparing actual payments and receipts with those which were authorised by parliament inthe annual budget. This approach still forms the basis of accountability for almost all governments across theworld. It is a simple and robust approach which provides assurance, through the audit of such accounts, thatgovernment spending has been in line with the agreed budget and that fraud and other irregularities have beenminimised.Cameral accounting is a specific government accounting model traditionally developed for cashaccountability. It has its historical roots and practice in German-speaking continental European countries(Austria, Germany and Switzerland; see e.g., Buschor, 1994). In recent years cameral accounting has beenreplaced,orisintheprocessofbeingreplaced,by´accrualaccounting´(seee.g.,Glöckner,2007),thusitmightsoon become a “forgotten accounting model” (Monsen, 2000). This is unfortunate, because the currentinternational development of government accounting would benefit from referring to - and learning from - thehistorical development of cameral accounting. In particular, a study of the historical development of cameralaccounting will tell us that attempts at replacing traditional governmental accounting (in the form of cameralaccounting) with ´accrual accounting´ (prepared within the framework of commercial accounting) ingovernment organizations is not such a recent phenomenon, as seems to be the general international opiniontoday. The following observations about earlier attempts at replacing cameral accounting with commercialaccounting are of particular interest:

Referring to the period 1500-1750:

“The introduction of commercial accounting for the whole public sector was only an intermission. It failed because insufficientconsideration had been given to the special requirements which the state sector has for its accounting system. One could nottotally overcome the problems in the way that had been chosen; rather one had to develop the existing accounting system (i.e., thecameral accounting system).” (Walb, 1926: 215; translated from German)

International Journal on Governmental Financial Management - 2008 51

Referring to the period after 1910:

“It is instructive to note that, as recommended and partly implemented 150 years earlier, the introduction of commercialaccounting was again recommended, even though this time it was limited to public enterprises. Further it is instructive to observe,that this time this approach again turned out not to be the correct one. Where one had followed this way, one has partly left itagain (Kieler Werft) or considers it not to be too favourable (Bayerische Staatsverwaltung).” (Walb, 1926: 224; translated

fromGerman)

“The latest development (of the cameral bookkeeping method) was therefore forced to follow the same route as the one followedafter the first crisis, namely further development of the existing (i.e., the cameral) bookkeeping method.” (Walb, 1926: 224;translation from German)“Attempts to introduce the commercial bookkeeping method in the state administration have always failed.” (Johns, 1951: 9;translation from German)

Furthermore, Mülhaupt (1987) states:

“Unfortunately, there are very few scientists and practitioners having any interest in the development and standardisation of thecameral bookkeeping method, something which is strongly regretted due to the importance of these questions.” (Mülhaupt, 1987, p. 119; translated from German)

It may be argued that the current international context of governmental accounting is different from that foundearlier in the German-speaking countries, when attempts at replacing cameral with commercial accountingfailed. Nevertheless, in an earlier article we argued that cameral accounting - in addition to commercialaccounting - should be incorporated into our discussions about how to develop governmental accounting:

“Before continuing the international trend towards the introduction of commercial (accrual) accounting in the governmentalsector, the time has come to revisit accounting history. In particular, the historical development of cameral accounting theoryshould - in addition to the theory of commercial (accrual) accounting - be incorporated into further governmental accountingdiscussions, and after such discussions, paying special attention to the objectives of governmental accounting, we could decideeither to continue developing governmental accounting within the framework of commercial (accrual) accounting or we couldreplace this framework with the cameral accounting framework of administrative cameralistics and enterprise cameralistics.”(Monsen, 2006, p. 377)

NowIwanttostrengthenmyargumentforfurtherstudiesofcameralaccountingbyreferringtoWynne(2007).He reports that “the use of accrual accounting by public sector entities is still unusual” (p. 26) and he questionsthebenefitsofreplacingtraditionalcashbasedgovernmentalaccountingmodelswithaccrualbasedmodels.In particular, he argues that “the cash basis of accounting ... should be accorded its appropriate status as a valid,modernapproachtopublicsectorfinancialreporting”(p.36).Therefore,thepurposeofthisarticleistopresentcameral accounting, with its strong cash focus, as an alternative to áccrual accounting´ (prepared within theframework of commercial accounting) for use in governmental organizations.Since cameral accounting will be presented as an alternative to commercial accounting, it is important toexplain the latter accounting model more extensively than appears to be the case in the current internationalEnglish-language literature. Hence, we will first turn our attention to commercial accounting, focusingspecifically on the relationship between the merchant’s bookkeeping methods and the accounting information prepared by these methods. Thereafter, cameral accounting will be explained, focusing on the relationship between the cameralist’s bookkeeping methods and the accounting information they provide. After this therewill be a discussion comparing áccrual accounting´ and cameral accounting, and the article will conclude byarguing that cameral accounting is preferable for use in government organizations compared to áccrualaccounting´, used by commercial accountants.

Commercial Accounting

According to Mülhaupt (1987), the main accounting concepts are revenues and expenditures (see Figure 1 below).Revenuesaredefinedasclaimsoncashreceipts,whileexpendituresaredefinedasobligationsforcash payments. The revenues and expenditures will always have a cash effect, either in the form of immediate or 52 International Journal on Governmental Financial Management - 2008

later cash inflows and immediate or later cash outflows, respectively. Furthermore, it may also be of interest tofocus on the level of profit earned as a result of the revenues earned or deferred and expenses incurred or deferred, respectively. This means that we have two main types of accounts, namely

cash accounts

(see theupperpartofFigure3),whichrecordimmediateorlatercashinflowsandimmediateorlatercashoutflows,and

accrual accounts

(see the lower part of Figure 3: records of revenues earned or deferred and expenses incurredor deferred) which aim to measure the profit earned.

Figure 1:

Revenues and expenditures (Source: Mülhaupt, 1987, Abbildung 5, p. 75;

translated from German).When entering the revenues and expenditures in the accounts, the merchant has three different bookkeepingmethods at his disposal (Kosiol, 1967). First, the

single-entry bookkeeping

was historically used to report theimmediate cash effect of the revenues and expenditures (i.e., immediate cash inflows and immediate cashoutflows, respectively; see Figure 3: upper part). This type of accounts is referred to as

cash accounts

. Over time, single-entry bookkeeping was developed to systematic single-entry bookkeeping.

Systematic single-entrybookkeeping

isstillbaseduponuseoftheprincipleofsingle-entry.Thesinglebookkeepingentriesare, however, entered systematically in the accounts, by separating money transactions with a performanceeffect (e.g., wages) from money transactions without such an effect (e.g., loans). Moreover, non-moneytransactions with a performance effect (e.g., write-ups and depreciations of fixed assets) are added, so that aresulting profit can be reported as the difference between the accrual effect of the receipts (referred to as´revenues earned´) and the accrual effect of the payments (referred to as ´expenses incurred´). Given the factthatsystematicsingle-entrybookkeepingallowsthereportingofprofitviathepaymentside(balanceaccounts)only (see e.g., Kosiol, 1967), and given the fact that the principle of single-entry bookkeeping, which is a principle for use in cash accounts (also see Oettle, 1990), is used in a systematic way, I refer to systematicsingle-entry bookkeeping as a bookkeeping method forming the basis of

modified cash accounts

with anelement of a performance reporting.

Overtimehowever,commercialaccountinghasdeveloped.

Double-entrybookkeeping

emergedinresponsetothe needs of business in Italy in the thirteenth century (Kam, 1990, p. 29), and Luca Pacioli’s book

Summa de Arithmetica Geometrica Proportioni et Proportionalita

(Review of Arithmetic, Geometry and Proportions) in1494wasthefirstbookondouble-entrybookkeepingtobepublished(seee.g.,Kam,1990,p.19),atleastinthewest.Whenusingtheprincipleofdouble-entrybookkeeping,everytransactionisenteredtwice(debit=credit),and two different accounts are used. In particular, the balance accounts, representing the payment side of thetransactions, and which are the accounts used in systematic single-entry bookkeeping, are supplemented withthe profit and loss accounts, representing the activity side of the transactions (Kosiol, 1967). Hence, use of double-entry bookkeeping allows for reporting the financial result via both the payment side (balanceaccounts) and the activity side (profit and loss accounts) (Walb, 1926). As a result, double-entry bookkeepingnow forms the basis of

commercial or accrual accounting

and the reporting of annual profits.International Journal on Governmental Financial Management - 2008 53

REVENUESEXPENDITURESImmediatecash inflowsLater cash inflowsLater cash outflowsImmediatecash outflowsRevenuesearnedExpensesincurredExpensesdeferredRevenuesdeferred